MEDIA RELEASE: New tax plan reduces dollars for public services, increases tax load for many North Carolinians

RALEIGH (April 14, 2014) – This tax season marks the final year taxpayers will file their income taxes under the state’s old tax code. By next year, a new report finds, it will be clear that the tax plan has not only reduced available dollars for investing in public services but also increased the tax load for many North Carolinians.

The tax plan passed by lawmakers last year shifts paying for public investments on to middle- and low-income taxpayers, and provides tax cuts to profitable corporations and wealthy taxpayers, said a report from the Budget & Tax Center, a project of the NC Justice Center. The new tax code has those at the lowest end of the income spectrum—$17,000 annual income or less—paying around 9.5 percent of their annual income in total state and local taxes. Taxpayers with an income of $345,000 or more will pay about 5.5 percent of their annual income in state and local taxes.

“Despite evidence showing no clear relationship between tax cuts and positive state-level economic performance, North Carolina lawmakers paid for these massive tax cuts for the wealthy by shifting the tax load onto middle- and low-income taxpayers, making the state’s already upside-down tax system worse,” said Cedric Johnson, a policy analyst with the BTC and author of the report.

The state’s tax system raises around 90 percent of its annual General Fund revenue from the personal income tax, corporate income tax, and sales tax. Under the final tax plan, there will be huge rate cuts for both the personal and corporate income tax, while covering the lost revenue by expanding the sales tax to include services that were previously not subject to tax.

By virtue of who pays these taxes, the result of this shift means that middle- and low-income taxpayers will see their taxes go up, the report said, while the wealthy and profitable corporations pay less, even as they capture a greater share of income growth during the economic recovery. Expanding the sales tax to services means that those who spend a greater share of their income on goods and services will pay more in taxes. Taxpayers at the upper end of the income spectrum pay only around 1 percent of their income in sales and excise taxes, the report said, versus 6 percent for lower income families.

Expanding sales tax to services could create positive change if paired with efforts to protect lower income households, the report said. Yet the tax plan eliminated a number of tax provisions that benefit struggling families and let the state Earned Income Tax Credit (EITC) expire, eliminating a proven tool for offsetting the negative impact of sales taxes on low-income workers. Nearly one million families across North Carolina’s 100 counties will claim the state EITC for the last time this year.

Shifting the tax load to middle- and low-income taxpayers is unlikely to spur economic growth, the report said, and will challenge the tax system’s ability to fund essential public services. Middle- and low-income taxpayers spend most of their income and increasing their tax load reduces their capacity to spend money on goods and services in the economy. The tax system’s heavier reliance on revenue from taxpayers whose incomes have stagnated or fallen challenges the state’s ability to invest in educating children, retraining workers, and quality infrastructure – which have all been shown to deliver strong support to state economic growth, the report said.

“The tax shift resulting from the tax plan passed by North Carolina state leaders last year does not represent a fair tax system that promotes shared economic prosperity for all North Carolinians,” said Alexandra Forter Sirota, director of the Budget & Tax Center. “Instead, it will undermine the state’s economy and the ability of the tax system to fund essential public services.”

The Budget & Tax Center will co-host a press briefing on Tax Day, Tuesday, April 15, to further highlight last year's tax plan and its impact on working North Carolinians. The event will be held at 10:30 a.m. in the auditorium in the Legislative Building at 16 W. Jones Street, Raleigh.